SATISFACTION GUARANTEED OR YOUR MONEY BACK

Wednesday, August 26, 2009

The fun just won't stop, will it? It's been a bum-clenchingly slow day today, which follows on the heels of similarly uninteresting days over the past week or two. Add in the fact that asset prices don't appear to respond to fundamental news (at least as Macro Man understands it), and you have the sort of classic August meandering that used to characterize the late summer before the onset of the financial crisis.

There doesn't even seem to be much point in short-term trading at this juncture, as the playing field is far from level. The security cordon around US data used to be pretty tight, but yesterday's consumer confidence figure was leaked, to the exact decimal place, several minutes before the official release. Perhaps the IRS will send Macro Man a pair of cotton khaki trousers with his next tax return, because it certainly feels like the US is turning into a Banana Republic.

Then again, given yesterday's budget projections, maybe not. Perhaps Big Ben can underwrite a new pants program sometime in his second term as Fed chief.

Anyhow, given the lack of action, interest, and predictability in today's market, it's perhaps worth looking ahead to September, when punters and fund managers of all stripes will be back from holiday and investment flows will be driven by rationales more compelling than "which stock has the lowest price?"

Now, normally, Macro Man could and would compile a list of favoured themes for the last four months of the year and try and figure out the best way to play them. Perhaps he has been numbed by the Novocaine of recent market lassitude, or perhaps his underlying belief in a noisy Q4 (as Lehman base effects and the inventory cycle wreak havoc on comparisons) is dominating his worldview, but he's struggling to come up with exploitable themes with which to go for it into the close of the year.

Sure, he's on board with the "lower for longer" game in front ends, though he expects quite a bit of vol in the reds in coming months. And while Macro Man believes that there's a good risk that the wheels come off of the Chinese equity "miracle" after National Day on October 1, that's a view that he's content to trade once he sees that it's actually materializing.

Other than that.....there's not much. Currencies are such a wasteland that Macro Man half-expects T. S. Eliot to start covering him. The further out you go in the yield curve, the less conviction he has in forecasting...hell, he can't even explian what he's seeing in real time! Perhaps there's an argument to start paying EM rates in certain sectors, though if Macro Man's "double dip" thesis is correct, that trade won't look so clever. Commodities? Macro Man's always been a tourist there...and given the surprise of the squeezes in, say, the base metals, a foray into these markets looks about as atttractive as a holiday to Flint, Michigan.

Maybe Macro Man just needs another cup of coffee this morning, or maybe he just needs to get August out of the way to focus his attention. But right now, his crystal ball is looking decidedly cloudy. So he throws it open to readers: what are your favourite themes and trades for the rest of the year?

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comments:

Anonymous
said...

Favourite trades in fixed income. Puts or put spreads on June Eurodollars, 98/97 put spread for example. Maybe also some cheap Dec9 structure to play for some LIBOR/OIS widening on back of FDIC and Fed disclosures. Something to position for sharp back up in rates, Oct TY 113 puts should do the trick.

I consider the pound as a proxy for the health of the oversized financial system and see it at parity to the euro. So I will first short equities and as they get ugly, closing equities and start shorting bonds.

Aggressively long (have been since mid-July) particularly telcos, Japanese and US steel, autos and even financials. We're seeing a massive restocking bounce - inventories have been emptied and they have to be refilled and despite the debt overhang I believe developed market consumers will follow on with increased demand. Big risks/unknowns: China - can they hold off economic apocalypse before demand recovers? how willing is anyone (consumers/companies) to spend given the volume of outstanding debt? what if stimulus/QE effects work off before the patient has recovered? if commods spike up too far then they'll ruin the party. Howvever right now you can get cheap money, commod prices are reasonable, PEs on equities are balanced and there are still some great value plays out there - all the conditions for this bounce to go further. And long the VIX as a hedge - not expecting Sept to be a smooth ride.

Currencies: harder to call. Long sterling???? ( against EUR??/) The yen ought to be tumbling right now but it's been remarkably resilient. If this bullish thesis is right then EM currencies vs US and long AUDJPY could be the way to go. BUt right now that's difficult. Perhaps JPY will resume normal service after the election.

It may be a coincidence, but the global industrial production growth momentum (3mth % ann) is likely to peak around September or October. That will probably signal the peak in the re-stocking trade, in my view. Equities, particularly global cyclicals, have rebounded hard on the inventory cycle (the same thing occured in the early 1930s) but will probably correct sharply once momentum fades again. Particularly if end-demand remains weak.

On currencies, the GBP appears to be on the knife-edge of a major move down agianst the dollar (I guess that may depend on your dollar view). Sterling has broken the recent uptrend (there was also confirmation in a MACD divergence). The fundamentals are also clearly poor and there is no interest rate support relative to the dollar.

buy european small & mid cap shares. the level of exposure to european market is extremely low at retail and institutional level (not as much the case in US and UK i don't think). Allianz had 300bn Assets under management. 30bn is exposed to equities. not nice to be in fixed income/money market when ECB says it has to raise rates. European stock market on one of biggest to US market in 20 years. and the socialist european model (ex out the smaller spain, ireland, portugal, greece mess ups) seems to have worked well. Europe the first to emerge from recession? there's even some positive stories coming out of Eastern europe now.....

Not original but... US bond yields definitely seem to be falling. This contradicts the "feel good" mood in the Dow. If equities swoon the Dollar would probably rise, along with the Yen.

A stronger Dollar and lower bond yields helps the US Treasury sell their debt, and they have bucket loads of Treasuries to sell.

Given that the markets are being manipulated this scenario would seem to suit them best so they might be quite prepared to let equities go hang. And of course GS et al would be ahead of the game.Just a thought..

asian stock markets rolling over, been on an aggressive bull market in the likes of taiwan, korea, india, china over past 6 months. Most of them rallying longer than developed as bottomed last year. Rallied enough, look rich, will take yrs to reach former peaks in revenues as exports weak, 30-40% drop would be par for the course based on past

I can't believe you have been bored the last times - you should trade more Emerging Markets!! I haven't had such fun and action trading in a couple of months as the last days. Bank of Israel hiking interest rates, 5v10 curve flattening by 50bp in 2 days and USD/MXN plunging 2% on the day are just some of the moves that have happened. After a really boring months I have seen hedge fund activity picking up like crazy (I am an EM trader in a London bank). Really can't believe you are bored, especially now when it is so uncertain if we will see a crash or another crazy rally in Sep.

- 1 year out calls on select grains- short 10yr gilt (eventually attention will shift to public deficit & smaller than thought output gap, rising inflation)- gamma (as somebody mentioned). calendar spreads to get long gamma and short long vol.- short JPY.

You have some RBA rises priced in there. If we get another leg down in 2010 and/or the China bubble gets pricked one could make a bundle.Downside: I am curious to see how far up they raise rates without the Western World joining them. Aussie Dollars would go above parity to the US one.Some liquidation selling Friday and Monday for timing.

Other than that still sticking with my post Green Shoots positions of short long treasuries via TBT, and relying on Templeton Global Bond Fund to pick thru global currencies and soveriegn bonds. That happens to be mostly BRICs, other Asian places, I think still Sweden and Norway, nothing British, and short the Euro.

Was feeling pretty good about these positions the past few months, but a double dip and/or return to risk aversion will toast this portfolio as well.

Still have cash too, so I may diversify into a Key Lime pie towards the end of the week.

Thought about shorting the yen, but it is 94 to the dollar, along with a yield curve flatlined near zero, a new trade deficit, and a recent pronouncement by the IMF that they will be technically insolvent by 2014 with a debt/gdp ratio of 240%. Presumably the massive personal net worth of Japan is still huddled safely at home in a checking account. This convinced me that whatever I thought I new about economimcs must be wrong, so now I'm afraid to do anything.

For those who have not seen today's news out China. The State Council has decided to take measures to control overinvestment in selected industries. In my view, this is significant and negative for Fixed Asset Investment (commodity demand). It appears that the strong growth in FAI and loan growth has spooked the authorities' and led to concern about over capacity.

There has not been too much impact on local equities or commodity-linked equities and currencies as I write, but there probably will be after the news sinks in.

Nemo may have more colour, but a short AUD looks like the right trade in my view.